Ergodicity, state prices, and long bond returns

Anthony Tessitore, Nilufer Usmen

Research output: Contribution to journalArticle

Abstract

We present an analysis of price systems in securities markets with infinitely many time periods and infinitely many uncertain states of the world. A key result is that a Markov price system (MPS) has a unique representation in terms of the returns on a known set of bonds. The result implies that securities prices are the discounted value of dividends, where discount factors are the reciprocal of the returns on a long-horizon discount bond.

Original languageEnglish
Pages (from-to)85-91
Number of pages7
JournalMathematical Finance
Volume8
Issue number1
DOIs
StatePublished - 1 Jan 1998

Keywords

  • Ergodicity
  • Incomplete markets
  • Long bond returns
  • Markov process
  • State prices

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